Tax tweak on coal yields net positive for discoms

The rationalisation of GST on coal from 5% to 18%, along with the removal of the ₹400/tonne compensation cess on the fuel, is expected to reduce the average energy charge rate of power generation companies by around 17 paise per unit, according to government officials and analysts.Although the GST rate increase might seem like a hike, it results in a net benefit for most grades of coal used in domestic coal-based power plants. “Overall, this is beneficial for India, as we have different grades of coal, and the weighted average cost comes down,” said a government official who requested anonymity.

India’s coal-based power plants primarily use coal grades G-10 to G-14, with a gross calorific value ranging from 4,300 to 3,400 kcal/kg. Some plants also use lower grades like G-6 and G-7 to a limited extent. These grades are likely to see a net gain after the compensation cess is removed. “While the headline GST rate has increased, the removal of the cess is expected to reduce the cost of generation for coal-based power generators,” said Vikram V, Vice President & Co-Group Head – Corporate Ratings at ICRA.

Vikram added that this reduction is also expected to benefit power distribution companies, potentially lowering their cost of supply by around 12 paise per unit. Coal-based power capacity accounts for nearly 70% of India’s total power generation.